Sunday, January 29, 2012

John Connally, US Secretary to the Treasury under President Nixon, in 1971, famously remarked to a group of European Finance ministers worried about the US exporting inflation via the dollar; “it’s our currency but your problem”. He also supported the US running an annual budget deficit of USD 50 Billion, would you believe, to stimulate the economy.

Apart from the fact a USD 50 Billion deficit these days lasts about 2 weeks, not much has changed. The USD is still the reserve currency and the US Treasury knows very well the power that this gives to export inflation world wide.

When the USD is no longer the reserve currency in which almost all international trade is conducted, the demand for USD will collapse, as will the exchange rate, and the inflation that the US currently exports, will come home to roost big time.

This has a direct implication in the current stand off with Iran. America made Iran into the region’s most powerful country, thanks mainly to the US the military industrial machine’s decision to invade and destroy Iraq. Iran’s oppressive regime, their implacable hatred for Israel and their thinly disguised bid to acquire nuclear weapons, is clearly not acceptable to the Western powers.

The saber rattling between the US and Iran, notably with Iran having military exercises in the straits of Hormuz, and the US having at one point three aircraft carriers in the region, have been getting a lot of attention by the international press and military strategists alike.

However the real war in the region is not seen by the general public and scarcely talked about in the press. It is a currency war.

The sanctions against Iran, apart from the depriving the ordinary citizen of basic essentials of life, include freezing of Iran’s central bank assets, principally USD received on the sale of oil, by far the country’s major export.

The impact of this has created massive overnight inflation, with black market exchange rates to USD skyrocketing. This means that all imports, from motor cars to washing machines, to food staples and medical supplies, have rocketed in price. This forces a significant sector of the population below the poverty level, and deprives the middle class of their hard earned standard of living. Clearly the purpose of sanctions is to foment enough internal misery, starvation and discontent to destabilize the country. In effect the west has already declared a clandestine war on Iran, and is waiting for them to lash out in order for the west to say we retaliated to an act of aggression.

However, unlike Iraq, which was put into a similar situation, Iran has a number of powerful allies, who do not want Iran to fall into the western sphere of influence. They include China, India and Russia, who understand the game perfectly well.

Iran supplies the majority of its oil to these countries, versus about 20% to Europe, and the last thing any of them want is for the US to have control over their supply.

A bomb shell was announced this week when Iran agreed with India to accept payment of oil in gold and not in USD. China and Russia are likely to follow and they are also receiving cooperation from Turkish banks, effectively by passing the western currency embargo.

Physical gold cannot be blocked in a New York bank account. President Chavez understood this perfectly when he insisted on taking physical delivery in Venezuela of the country’s gold reserves, much to the chagrin of the US in particular.

This move is of enormous significance, as in parallel, major trading partners such as China, Russia, India and Japan are creating payment arrangements which bypass the USD. It is extremely bullish for Gold and very bad news for the USD whose dominance of USD denominated world trade suffered a major blow.

This may even be the turning point in the decline of the USD’s importance in world trade.

Through these acts of economic aggression, the US and the west have probably polarized not only the Middle East but also aligned against them a formidable grouping of economically powerful countries, who felt their vital interests were being threatened.

Currency wars are every bit as real as shooting wars, and for the moment Iran has played their cards rather well.

The key difference between a Central Bank and a normal Bank is the capability to print money. The euphemistic term is Quantitative Easing “QE” frequently cited by the Ben Bernanke and Sir Mervyn King, generally with a straight face, as though this were the panacea for all our troubles.

Other expressions, such as the bank acting as a “lender of last resort”, also sounds pretty good, almost as though some “Godfather” of the financial world was deploying small part of its vast resources to back stop to all problems.

This is however like the financial world’s equivalent of the Orwellian “Ministry of Truth” pumping out propaganda and lies.

The reality is that quantitative easing is creating money out of thin air, and lender of last resort is creating money to lend to financial institutions, to which no-one in their right mind would ever contemplate giving a penny. In addition the only Godfather behind all this is you the taxpayer and your children and grandchildren.

Recent years have seen an unprecedented explosion of “assets” central bank balance sheets. The 2007 pre-crisis combined balance sheets of the major European central banks; Bank of England; Bank of France Bundesbank and Swiss National Bank, totaled approximately USD 550 Billion. Today it has become USD 2,700 Billion, a five times increase in 4 years.

In much simplified terms, central banks main assets are composed of cash in local and foreign currencies, investments in government bonds, loans to financial institutions and holdings of gold and precious metals.

This colossal explosion in the “assets” held by central banks is paid for by money conjured up out of no-where, by an electronic printing machine. You too can do this at home, but that would be considered counterfeiting, and you could go to jail for debasing the currency. Only Central Bankers are allowed to hit the “Control P” button on their PC with impunity.

This expansion is a global phenomenon. In the same period the balance sheets of the Fed; ECB; Bank of Japan and Bank of China have expanded from USD 7,000 Billion to USD 15,000 Billion approximately.

For the lucky Europeans, we are now the proud owners of Greek, Portuguese and other bonds taken off the market because nobody else wanted them. Our central banks have loaned money to illiquid and insolvent banks, which if capitalist market forces had been allowed to work, would have gone bankrupt a long time ago.

Equally, if the investments held by these Central Banks were marked to market all the central banks, whose capital and reserves are minimal compared to their total balance sheets, would be totally wiped out. They are more leveraged than hedge funds, and more bankrupt than Enron or MF Global.

So what solutions do these geniuses of economics and finance have to propose? Why of course more of the same. Like a chorus in unison, from Washington, Mme Lagarde, Sir Mervyn King, Mario Draghi, like a collection of Globalist Oliver Twists all “want some more”, many, many trillions more.

The new money will be used to loan to bankrupt banks, which in turn will buy the bonds of bankrupt countries, to keep the system going a bit longer. This will also ensure that when the collapse comes, the irrecoverable trillions of assets will be on the central banks balance sheet, and the losses will be for the taxpayer, while banks which created the mess will escape.

So let us consider a moment Greece. In order for their bail out to be approved and the ECB; IMF etc to purchase their defaulting bonds, plus the new bonds to be issued, the latest proposed preconditions are, that they pay bondholders creditors first (e.g. before paying old age pensions, the police force, the military and hospital staff).In addition, they should cede their fiscal sovereignty and control over sale of state assets; de facto give up their state sovereignty.

In exchange Mr Draghi and Ms Lagarde will hit the “control P” button on their PC for a few seconds, dump the risk relating to this new debt on the Global taxpayer, while the banks get their principal and interest reimbursed in full.

I have said before Greece should default and leave the Euro zone. If ever there was a moment to do so it is now. They should reject banker occupation and bureaucratic dictatorship. They should give a clear lead to other countries, Portugal, Spain, Italy etc. that it is better to suffer and be free than live as multi generational debt slaves.

Wednesday, January 25, 2012

A reader of my Blog entitled “SEC Regulators or Resetters”, suggested I took a closer look at the correlation between the most fraudulent banks league table, and those same institutions overall contributions to the Presidential campaign of Obama and McCain in 2008.

SEC

TOTAL

BANK

Description of Fraud

Penalty

USD 000

UBS

Offshore Banking services tax fraud

Fined

780,000

Goldman

Civil Fraud (SEC cut - USD 300 Million)

Fined

550,000

Citi

Bubble Securities

Fined

285,000

J P Morgan

Mortgage securities

Fined

154,000

1,769,000

OBAMA

McCAIN

TOTAL

DONOR

Ranking

USD 000

Ranking

USD 000

USD 000

Largest Donor

1

1,618

1

375

1,993

Goldman Sachs

2

1,013

5

240

1,253

J P Morgan Chase

6

808

2

343

1,151

Citigroup

7

736

3

338

1,074

UBS

15

532

9

187

719

4,197

Here thanks to data supplied from Open Secrets, an excellent source of information are the results:

All these institutions are amongst the top ten largest contributors to BOTH candidates. “It is almost as though they did not care who won, so long as he was bought and paid for before reaching office”. Oh forget it; I’m sure that must be completely wrong!!

Maybe this also helps to explain that since taking office, we have not seen any criminal charges raised against top executives of any of these banks by the Obama White House.

UBS only number 15 in the Obama Donors league, with USD 532K, got the biggest fine of USD 780,000K. Perhaps there is a lesson to be learned in Zurich and Bern?

For anyone expecting “Hope and Change” with Romney, take a look at his donors list, it is all the usual suspects.

There is an old saying that”if your wife catches you in bed with another woman the only thing to do is deny it”. So it is with the financial system in today’s world.

The parallel with Credit Defaults Swaps is remarkable and the US Government has already created the regulatory equivalent of the cheating husband to deal with such an eventuality. It is called the International Swaps and Derivatives Association (“ISDA”)

Created in 1985, it was run by a former J P Morgan Managing Director of some 25 years seniority, Mark Brickell who was President from 1988 to 1992. At the end of his tenure he became the chief lobbyist for the industry. His subsequent “successes”, if you can call it that today, included helping to defeat all US Congressional efforts to regulate derivatives in 1994 and again in 1998. It would be fair to say he served his masters well.

Having once displayed his credentials as a regulator who was allergic to regulation, President Bush nominated him to be chief regulator at Freddie Mac and Fannie Mae, the biggest and most bankrupt government sponsored real estate companies on the planet. How is that bail out working out by the way?

In 2005 the ISDA also allowed rule changes to CDO payouts that would benefit those who bet against (shorted) mortgage-backed securities. We all know how well that has worked out for Goldman Sachs J P Morgan and others.

ISDA also has a series of regional committees empowered to make official binding decisions as to what constitutes a “credit event” such as a default. Greece or Portugal etc defaulting on their scheduled debt payments being a simple illustration, although there are many complex variants to this theme.

What is extremely important however are the consequences of a credit event, namely the triggering of what is effectively an insurance policy called a “credit default swap” (“CDS”), payable in full to the holders of the defaulted debt.

So who then are the issuers of the CDS who would have to pay up; well of course the too big to fail banks. Their plan rather like AIG in the sub prime crisis was to cash the insurance premiums, make huge profits and executive bonuses, on the assumption they would never be called upon to pay. When the sub prime fraud blew up in 2008, AIG was bailed out with tens of billions of dollars by the US taxpayer.

So how much could the losses be from triggering credit default swaps? In this shady unregulated world of shadow banking nobody really knows.

The Bank of International Settlements (“BIS”) produces bi-annual statistics which show outstanding credit default swaps of USD 32 TRILLION. To put this is perspective the entire equity of the top 5 US banks is barely USD 1 Trillion. It does not need a genius to work out that there may be a problem.

Incidentally the BIS total reported derivates, including interest rate swaps, exchange rate swaps and credit default swaps, is an utterly mind blowing figure of USD 700 Trillion, or over ten years global GDP. How strange the world’s financial elite failed to see this as a problem?

However, in reality, the central bankers, finance ministers, all the major banks and even Warren Buffet, who described these derivative products as “Weapons of mass financial destruction” are fully aware that this gigantic powder keg exists, waiting to be triggered by a “Credit Event”.

This is the real risk of Greece, and has nothing at all to do with the measly USD 200 Billion, of un-payable debt, which makes all the mindless mass media headlines. After all USD 200 Billion is barely two months of US budget deficit.

It has everything to do with avoiding at all costs the detonation of the derivative products.

So when a Credit Event arises, IDSA the sole official and as explained above, “completely honorable and independent “ arbiter, will just like the married man caught in the act, simply deny it.

Tuesday, January 24, 2012

No review of financial Regulators would be complete without a few words on that “paragon of ethical virtue, transparency and professionalism”, the Commodities and Futures Trading Commission (“CFTC”). This organization is for commodities the equivalent of the SEC for stocks and shares.

The stated mission of the CFTC is “to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures”. Let’s see how well they do their job.

They are an “Independent Government Agency”, which means they are not directly under Presidential control. That sounds good, so whose control are the under? The present Chairman is Gary Gensler, who previously worked for “you’ll never guess …Goldman Sachs”. He also worked in the Clinton administration under Robert Rubin, treasury secretary who previously was joint chairman of “you’ll never guess …..Goldman Sachs”. He is part of the revolving door policy between Washington and Wall Street, practiced so effectively elsewhere. Why would a highly paid Goldmanite take a low paid Government job, well because he is very useful in that position. At the end of his tenure he will be the Financial Mafia equivalent of a “Made Man” with a very useful address book.

The CFTC is funded by the US Government and oversees multi-trillion dollar markets, and with over 600 staff and a budget approaching USD 200 Million, one would have thought they are well equipped for the task. However ……

Recently, MF Global, a major trading house, run by Jon Corzine, ex Champagne socialist Governor of New Jersey, and yet another former Joint Chairman of “you’ll never guess…..Goldman Sachs”, imploded, with losses exceeding USD 1 Billion, the sixth largest bankruptcy in US history. Incidentally Corzine almost succeeded in bankrupting New Jersey as well.

This caused Mr Gensler to refuse to handle the file due to his close personal relationships with Corzine. Did nobody notice this conflict when Gensler was being confirmed in the position, or perhaps that is why he got the job?

An amazing feature of bankruptcies is that sensational newspaper headlines always cover those who lost the money. They never go looking for the guys on the other side of the trade who MADE a billion. If you know in advance you will lose a billion it should be easy to find friends to help you out on the winning side of the trade. Oh forget it, just a nasty thought, I ‘m sure it could never happen.

In another case of willful blindness the CFTC has failed to investigate the multi year 24/7 fraudulent manipulation of the gold and silver markets, perpetrated by notably JPMorgan Chase and HSBC. These banks have for years maintained massive short positions in both precious metals, and the shares of producing companies with a view to suppressing price. The CFTC has been inundated with literally thousands of letters of complaint and have heard from expert testimony, notably from Harvey Organ, the impact these short positions have on price.

They even heard directly from a “Whistle Blower”. Isn’t it curious how honest citizens are called whistleblowers, but crooks are not called crooks? Mr Andrew McGuire having advised when J P Morgan traders were going to attack the market and having recordings of their conversations when the raid was going on, actually was deliberately cut short during his detailed testimony of events to the CFTC.

If this sounds incredible both testimonies are available on You Tube.

So the CFTC, REGULATORS OR AIDING AND ABETTING FRAUDULENT MARKET MANIPULATION, you decide?

Friday, January 20, 2012

The general public is becoming increasingly aware of the extent of fraud and corruption which is endemic within the financial system. We could give the entire sector a Triple CCC rating namely Corrupt Crony Capitalism.

So how have they been able to get away with stealing for so long with so few people asking questions? It is because the whole system is rigged to have the appearance of regulatory governance and oversight. A fine example is the Securities and Exchange Commission (“SEC”).

Let us first look at how the SEC came into existence, (Source text in Italics Wikipedia).

“Following the 1929 Wall Street Crash, the U.S. economy had gone into a depression, and a large number of banks failed. The Pecora Investigation sought to uncover the causes of the financial collapse. As chief counsel, Ferdinand Pecora personally examined many high-profile witnesses, who included some of the nation's most influential bankers andstockbrokers.

The Pecora Investigation uncovered a wide range of abusive practices on the part of banks and bank affiliates. These included a variety ofconflicts of interest, such as theunderwritingof unsound securities in order to pay off bad bank loans, as well as "pool operations" to support the price of bank stocks. Does any of this sound familiar?

The hearings galvanized broad public support for new banking and securities laws.

As a result of the Pecora Commission's findings, the United States Congress enacted theGlass–SteagallBanking Act of 1933 to separate commercial and investment banking, the Securities Act of 1933to set penalties for filing false information about stock offerings, and theSecurities Exchange Act of 1934, which formed the SEC, to regulate the stock exchanges. Pecora was appointed as one of the first commissioners of the SEC.

In 1939 Ferdinand Pecora published a memoir that recounted details of the investigations,Wall Street under Oath. Pecora wrote: "Bitterly hostile was Wall Street to the enactment of the regulatory legislation." As to disclosure rules, he stated that "Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker's stoutest allies."

History repeats itself every 75 years or so. These very laws, detrimental to banking interests but essential to protecting the general public, were either repealed or ignored by corrupt regulators, congress and executive branch.

To illustrate the point over the past few years the SEC has fined almost all of the top 10 Global Banks for serious offences.

The League Table of crooked banks, fined over USD 100 Million and their fraud specialty is shown below:

UBS USD 780 Million Offshore banking services tax fraud

Goldman USD 550 Million Civil Fraud; (SEC cut only USD 300 Million)

Citi USD 285 Million Bubble Securities

J P Morgan USD 154 Million Mortgage securities

Wells Fargo USD 148 Million Misleading Investors

The reality is that those banks commit crimes and fraud unabated against their clients and third parties. We only know of the cases where they actually get caught with their hand in the till.

Complaints are lodged with the SEC as regulator who investigates and imposes fines against the banks without either the banks or their management being charged criminally for any wrongdoing.

Thereafter the banks are charged what to the public seem a lot of money but to a Global bank are a few short weeks of profit in the overall scheme of things, ultimately paid for by the shareholder.

The true beneficiaries of all this are the SEC who pocket literally billions in fines on the back of the crimes committed, while the unfortunate investor loses in general many multiples of said amounts, while leaving their banking cronies in place to do it all over again.

They should be in the Guinness Book of Records as the world’s most successful re-setter

About Me

The author is a British/Swiss dual national, with a Law Degree and a Chartered Accounting qualification. His background includes positions in general management, finance, private equity, start ups, business development, M&A, turnarounds and trust & family office work. He has worked for major Swiss and US multinationals, global banks, and UHNW businesses.
For full details consult the LinkedIn profile
http://ch.linkedin.com/pub/david-l-smith/4/5b6/65a